Wednesday, October 22, 2008

In recent years, as Wall Street boomed, Americans often dismissed Europe as a place for languorous meals and vacations, not economic innovation.

London remained a financial hub, of course, but it was often treated dismissively — as a flashy aberration pumped up by petrodollars from Russia and the Gulf, an exception to the otherwise somnolent Continent.

That kind of thinking is now under challenge, because during the last 10 days Europeans have proved more nimble than Americans at getting to the root of the global financial crisis, whatever they may have lacked as innovators.

After initially dithering, Europe’s leaders came up with a financial bailout plan that has now set the pace for Washington, not the other way around, as had been customary for decades.

That was clear when the Treasury Department decided to depart from its own initial bailout plan — the one approved by Congress earlier this month — and invest up to $250 billion directly in the nation’s banks. The nuts and bolts of that approach had been laid out days earlier by European leaders as they tried to save their own financial system.

And that outcome left Gordon Brown, the British prime minister, and Nicolas Sarkozy, the French president, in something of a commanding position to claim the title of wise men. They are now speaking of creating a Bretton Woods agreement for the 21st century, while the leaders of the country that fathered the postwar financial system worked out at Bretton Woods, N.H., prefer to stay away from such big-picture talk.

In London, where Britain’s willingness to follow the United States into Iraq five years ago still evokes outrage, officials have been especially quick to point out they didn’t follow Washington’s lead this time.

“There’s no doubt that it was a British plan that was copied by the U.S.,” said Leon Brittan, who served as Home Secretary under Margaret Thatcher and was a top official at the European Commission. “It shows that the American conception of Europe as an economic basket case is outmoded and wrong.”

“Europe showed the capacity to respond to a crisis more quickly than the U.S.,” he added. “The U.S. went through agonies to come up with a plan.”http://www.nytimes.com/2008/10/19/weekinreview/19schwartz.html?partner=permalink&exprod=permalink

Monday, October 20, 2008

“The next president will inherit a fiscal and economic mess of historic proportions,” said Senator Kent Conrad, chairman of the Senate Budget Committee.

The New York Times - Like water rushing over a river’s banks, the federal government’s rapidly mounting expenses are overwhelming the federal budget and increasing an already swollen deficit.

The bank bailout, in the latest big outlay, could cost $250 billion in just the next few weeks, and a newly proposed stimulus package would have $150 billion or more flowing from Washington before the next president takes office in January.

Adding to the damage is that tax revenues fall as the economy weakens; this is likely just as the government needs hundreds of billions of dollars to repair the financial system. The nation’s wars are growing more costly, as fighting spreads in Afghanistan. And a declining economy swells outlays for unemployment insurance, food stamps and other federal aid.

The New York Times - When executives own big stakes in the companies they run, investors can rest a little more easily at night, knowing those managers have the shareholders’ best interests at heart. Except when maybe they don’t.

As the staggering destruction of wealth in the stock market has recently revealed, executives can sometimes appear to own shares in a company, but have actually pledged them as collateral for a loan. And if there is a sharp drop in the stock’s value, the executive may suddenly be forced to dump those shares, very likely adding to the stock’s downdraft.

And the other shareholders probably never saw it coming.

As it turns out, while corporate insiders must disclose their comings and goings in their companies’ shares, experts say there are no hard and fast rules requiring that the public be told when an executive has put a big block of shares at risk by borrowing against them.

Already this month, there have been about $1 billion in sales by company insiders dumping stock to meet margin calls, as lenders’ demands for the stock sales are known. According to Equilar, an executive compensation research firm in Redwood Shores, Calif., executives at three dozen companies have disclosed such sales since October.

Under Securities and Exchange Commission rules, executives are typically required to disclose insider sales within two days of making them and indicate why they were sold, including as a result of a margin call. But experts say there are no rules requiring that the public be told ahead of time that an executive has pledged stock in a margin loan or how the borrowed money is being used. It might be a loan to buy more shares of the company’s stock — which would indicate a vote of confidence in the shares. Or it might be a loan to buy some other company’s stock or something else altogether — possibly a sign that the executive thinks there are better places to invest. http://www.nytimes.com/2008/10/20/business/20pay.html?partner=permalink&exprod=permalink

Friday, October 17, 2008

The Wall Street Journal - The financial and economic tsunami that has ripped through Wall Street and the housing market is beginning to wash across the college green.

Higher education hasn't yet seen anything to compare with foreclosures and bank nationalizations in the private sector. But seized-up credit markets, shrinking endowment funds and a reduction in state subsidies are punishing universities from California to Vermont.

A campus construction boom is slowing, administrations are cutting jobs and faculty may be forced to pay more into their pension funds. The demise of a $9.3 billion investment fund used by 900 colleges has some schools scrambling to pay their bills.

It all brings a gloomy pall to what has been, until recently, a booming industry. Higher education has grown rapidly in the last half-century into a formidable slice of the economy. U.S. colleges and universities spend $334 billion annually, employ 3.4 million people and and enroll 17.5 million students.

The boom was powered by a growing stream of donations, strong returns on endowments, rising enrollments and tuition prices that climbed well above the rate of inflation -- paid, more and more, by families who borrowed heavily to meet the bills.

All of these wealth generators for the Ivory Tower are facing threats in the current economic turmoil. The cratering stock market has already hit endowments. Falling markets typically take a toll on gifts, many of which are made, for tax reasons, in the form of appreciated stocks and bonds. Analysts and schools are predicting even bigger tuition increases than those seen so far. But this time, families may be in no position to meet the higher bills. Falling house prices have sapped their ability to use home-equity loans for tuition payments, and the credit crunch has forced many lenders to stop making student loans. http://online.wsj.com/article/SB122420679058043423.html?mod=article-outset-box

The New York Times - In difficult dinner-table conversations, college students and their parents are revisiting how to pay tuition as personal finances weaken and lenders get tough.

Diana and Ronnie Jacobs, of Salem, Ind., thought their family had a workable plan for college for her twin sons, using a combination of savings, income, scholarship aid and a relatively modest amount of borrowing. Then her husband lost his job at Colgate-Palmolive.

“It just seems like it’s really hard, because it is,” Ms. Jacobs, an information technology specialist, said of her financial situation. “I have two kids in college and I want to say ‘come home,’ but at the same time I want to provide them with a good education.

The Jacobs family may be a harbinger of what is to come. Ms. Jacobs pressed the schools’ financial offices for several thousand dollars more for each son’s final year of college, and each son increased his borrowing to the maximum amount through the federal loan program. So they at least will be able to finish at their respective colleges.

With the unemployment rate rising and a recession mentality gripping the country, financial aid administrators say they expect many more calls like the one from Ms. Jacobs. More families are applying for federal aid, and a recent survey found that an increasing portion of families expected to need student loans. College administrators worry that as fresh cracks appear in family finances, they will not have enough aid money to go around, given that their own endowment returns are disappointing, states are making cutbacks and fund-raising will become more difficult.

The New York Times - Trust is a precious thing, and the banks still don’t have much of it. Not from the public, and not from one another.

The government’s latest bailout plan — to invest $250 billion in banks with few strings attached — could help restore that trust. But it will succeed only if the government is able to make it clear that those investments confer a sort of “Good Bookkeeping” seal of approval.

That will depend on whether the government makes sure that the cash goes only to banks that are in decent shape, or at least will be after they get the cash.

The signs of possible distress that the government should look for go far beyond toxic mortgage securities and credit-default swaps. Many smaller banks were not invited to those parties, and therefore suffer no hangover from them. But real estate construction loans, both for homes and commercial buildings, were far more prevalent in banks all around the country. Credit card losses are looming as unemployment rises.

It will take weeks, if not months, for the government to prove that it will invest the money wisely. But so far, it has not even made clear that it is determined to leave out the bad banks.

Treasury officials say they have not made any decisions on what criteria will be used to decide which banks are allowed into the program, other than to consult with regulators. That is probably true; the government’s frantic efforts to halt the slide in recent weeks have had a “ready, fire, aim” feel to them.

Or, in the gentler words of the Federal Reserve chairman, Ben S. Bernanke, “Our strategy will continue to evolve and be refined as we adapt to new developments and the inevitable setbacks.”

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Where to Find Mark Tatge

EW Scripps Visiting Professional

Teaches journalism at DePauw University where he is the Pulliam Distinguished Visiting Professor of Journalism. He previously spent three decades working at Forbes Magazine, The Wall Street Journal, Dallas Morning News, Denver Post and Cleveland Plain Dealer. Tatge appears as a guest commentator on the CNN, MSNBC, ABC, PBS, FOX where he speaks on economic, business and political, trends.